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Tuesday 9 December 2014

HOW WINNING BANKS REFOCUS THEIR IT BUDGETS FOR DIGITAL


Not all investments in digital appear to pay off—a selective approach is essential when digitizing the enterprise.

December 2014 | byGiuliano Caldo, Matthias Hoene, and ’Tunde Olanrewaju

Digital technology is transforming the financial-services industry, and banks face the challenge of fully digitizing their businesses. To do so, they must decide where to invest in digital and how to justify these investments amid rising IT budget pressures.
Our research on the state of digitization among financial institutions in Eastern and Western Europe suggests where digital investments are best placed,1 most notably in automation of back-office processes and in sales-side analytics. In contrast, for example, investments in multichannel integration do not appear to have been as effective for these banks. We reached our conclusions by measuring factors across four dimensions: first, the level of digital enablement provided by IT with respect to end-to-end automation of processes, sophistication of digital channels, and analytics for decision making; second, the level of IT spending; third, the maturity of IT practices; and fourth, the bank’s level of overall cost and profitability.

By correlating the cost/income ratio with the level of digital enablement, we found that banks’ profitability is related only to specific areas of IT digitization. While correlation does not neces­sarily imply causation, it is interesting to see that more profitable banks have been investing in a few common areas. The areas with the highest correlation with profit­ability were product back-office automation, digitization of document management and automation of credit decisions, and big data analytics applied to sales campaigns. The profit margins of banks with high levels of digital enablement in these areas were, on average, twice as high as the profit margins of other European banks.

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